Yuan’s Strength Signals Fresh Momentum for Emerging Market Currencies

The gradual strengthening of the yuan is giving emerging market currencies some lift. Data from Bloomberg indicate that over the past year, a 1% move in the yuan has closely echoed in the Thai baht, Malaysian ringgit, Chilean peso, Mexican peso, and Brazilian real. At the end of August, the 30-day correlation between the yuan’s reference rate against the dollar and the MSCI Emerging Market Currency Index reached 0.59, the highest since May 2024.

As China is the largest trading partner for much of Asia, Beijing’s foreign exchange policies are closely monitored, with ripple effects extending beyond the region to commodity-linked economies. While the MSCI EM Currency Index slipped 0.3% this quarter after two straight quarters of gains, it remains up about 6.8% for the year, largely influenced by the Fed’s shifting stance on interest rates. Analysts suggest there is still scope for emerging currencies to advance, particularly as China’s central bank has shown signs of moving away from its earlier focus on simply stabilizing the yuan.

On September 9, the People’s Bank of China fixed the yuan at its firmest level against the dollar since last November, reversing its earlier policy of damping volatility from dollar moves. The onshore yuan, which trades within a 2% daily band around the reference rate, has risen more than 2% against the dollar so far this year, breaking a three-year streak of losses. Investor optimism has followed: hedge funds have built up bullish bets, targeting levels near or below 7 yuan per dollar before year-end, compared with about 7.12 last Friday.

This shift runs counter to earlier speculation that Beijing might weaken its currency to offset U.S. tariffs. Instead, VanEck Associates and other firms have increased exposure to emerging-market local-currency bonds over dollar-denominated assets. China was the second-largest trading partner for developing Asia in 2024, accounting for roughly 9% of total trade, IMF data show.

At the same time, Beijing is intensifying efforts to expand the yuan’s role in global finance, a campaign helped by skepticism toward U.S. dominance that has eroded the dollar’s appeal. Strategists argue that a stronger yuan not only supports Asian currencies and debt markets but also reinforces the region’s longer-term shift away from the dollar.

Adding to the currency’s significance, fresh U.S.–China trade talks began in Madrid this week, potentially paving the way for a meeting between Donald Trump and Xi Jinping in October. Continued strength in the yuan, some analysts argue, could indirectly support Washington’s negotiating stance given the currency’s prominence on the global stage.